Better For Some, Worse For Others

As Personal Debt Shrinks for Some, Others Face Crisis

The way people spend money reveals a great deal about their financial attitudes. And if the recent uptick in consumer spending is any indication, UK shoppers are feeling pretty good about the economic recovery. But economic trends send mixed signals, so it makes sense to consider the big picture before jumping to conclusions. And though positive economic activity is good, by most measures, spending driven by debt is unsustainable.

As many borrowers found out in 2008, taking-on too much debt leads to catastrophic outcomes. And though stop gap measures have been fortified within the mortgage industry, a new wave of debt is showing up, as consumers increasingly rely on loans and credit cards to make routine purchases. In fact, fourth quarter data is disturbing to some analysts.

Increased Reliance on Debt

Late year numbers indicate UK shoppers tallied more than £1.25 billion in new charges to credit cards, loans and overdrafts – in November alone. The figure represents the largest amount of debt amassed in the same month during any of the following seven years. According to the Bank of England the pace of the three month rise in debt is the fastest seen since 2005 and the November figure is 6.9% higher than last year’s same-month total.

According to analysts, overall debt, as a share of personal income, is on the decline. And while this is good news, it doesn’t acknowledge a growing credit problem. Alongside credit gains made by some consumers, low income families and young borrowers are facing crises level debt concerns. So while the overall trend is encouraging, dissecting it sheds light on who is actually paying-off debt. Upon further examination, data reveals that mortgage holders and debtors over age 50 are the ones paying ahead on loans and shouldering the positive gains, while those under age 40 are taking-on expensive mortgages and using credit cards to cover their short-term expenses.

What is Behind the Credit Boom?

Personal money management is challenging, even when it’s based upon sound financial principles. But finance dependent upon excessive credit fosters disastrous outcomes. So why are so many UK residents climbing aboard the unsustainable strategy?

Necessity is subject to interpretation, so credit is used to make purchases of all kinds. And in a hyper-competitive credit market, lenders and credit card companies make it more attractive than ever to put-off payment and finance immediate buys. Aggressive marketing campaigns and promotions have actually drawn the attention of regulators, who are once again investigating predatory practices.

Mortgage lending supports strong economic numbers, but home loans issued to struggling debtors can be problematic. Already using other forms of credit to make ends meet, mortgage payments only add to the unmanageable burden of payback for some young and low-income borrowers. As David Cameron pledges to keep mortgage rates low, investors are also taking cues from the Bank of England, which appears content to leave rates alone. These same consumers are leaning on the belief that employment conditions are back on track for long-term recovery.

Is it a Volatile Mix?

Economies respond to myriad influences, which can be difficult to isolate. What is known, however, is that general economic health relies largely on mainstream borrowers’ ability to repay loans, mortgages and credit card obligations. Without this bedrock foundation in place, the financial system remains vulnerable, as it was in 2008.

Many UK borrowers currently share risk similar to that experienced during the economic downturn of the past decade. With much of their discretionary income already devoted to mortgage payments and other costs of living, they are exposed to shifts in financial markets, which could leave them unable to pay. On a widespread scale, their default could amount to another major global crisis.

Proponents of liberal lending standards point to job and productivity growth, which they believe is capable of sustaining the growing levels of personal debt carried by some members of the UK population. And while it is hard to argue against prosperity, false gains mean little more than stagnation.

Despite lower debt levels for some UK residents, certain borrowers remain at-risk. Some young mortgage holders, for example, must buoy their cash flow with loans and credit purchases, which may ultimately prove unwise. With predictions projecting continued low interest rates, however, there are no signs of slowing the current credit boom.

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